Page 178 - SAIT Compendium 2016 Volume2

IN 2 (3) Income Tax acT: InTeRPReTaTIon noTes IN 2 (3)
• to improve or enhance the value of such share or participatory interest
may be taken into account in determining the base cost of such listed share or participatory interest for capital gains tax purposes. The interest expense must directly relate to the ownership of the share or participatory interest.
Paragraph 20 (3) (a) of the Eighth Schedule on the other hand limits the costs that may be added to the base cost of an asset to those costs which have not been deducted from income.
Hence, if a person disposes of a foreign share or foreign participatory interest while having a balance of excess interest (including any amount of excess interest brought forward from the previous year of assessment under section 11C (3) (a)) available at the time of such disposal, one-third of that balance may be added to the base cost of the foreign listed share or foreign participatory interest under paragraph 20 (1) (g) of the Eighth Schedule. Any balance of interest relating to the purchase of foreign unlisted shares will not qualify to be added to base cost on disposal of those shares, and will simply be forfeited.
The above is only valid if and to the extent that paragraph 20 (3) (a) of the Eighth Schedule does not apply, that is, if and to the degree the available interest expenditure is not allowable as a deduction in determining the taxable income of the person disposing of the share.
Example 5 — Determination of base cost when a person has an unused interest expense deduction under section 11C
Facts:
A portfolio investor acquires 1 000 shares in a foreign listed company at a cost of R100 000 which he nances by means of a loan. During the year of assessment under review he disposes of all the shares for R200 000. On the date of disposal the balance of excess interest which has not been deducted from income derived from foreign dividends under section 11C amounted to R15 000. No foreign dividend was derived from the foreign shares during that year of assessment.
Result:
Balance of excess interest (section 11C) Less: Non-allowable portion (2/3 X R15 000) Interest that may be added to base cost Proceeds
Less: Base cost
Cost of acquisition
Allowable interest
Capital gain
RR 15 000
(10 000) 5 000 200 000 (105 000)
95 000
100 000 5 000
A taxpayer who disposes of a portion of a holding of shares of a particular class in a foreign-listed company must allocate any excess interest expense to the base cost of the shares disposed of on a pro-rate basis.
5. Further examples to illustrate the application of section 11C to a natural person who is a portfolio investor
Example 6:
The following information pertains to the 2009 year of assessment of an individual.
Gross foreign dividends received (taxable and exempt)
Foreign dividends exempt under section 10 (1) (k) (ii) (bb)
Foreign dividends exempt under the basic investment income exemption (section 10 (1) (i) (xv) (aa))
Taxable foreign dividends [R11 200 – (R1 000 + R3 200)]
Interest income earned
Interest expense actually incurred in the production of foreign dividends Result:
(1) Calculation of the amount of interest deductible under section 11C (1)
Interest expenditure
Balance of interest brought forward from the previous year of assessment (section 11C (3)) Total amount of interest available for deduction in the current year of assessment
R 11 200
1 000 3 200
7 000 Nil 15 000
R 15 000 Nil 15 000
170 saIT comPendIum oF Tax LegIsLaTIon VoLume 2